Neil Barton

Wednesday, September 16, 2009

My Last Word On Contractual Benchmarking

It's not very often that a company advertises its services as "contentious, time-consuming and expensive", but that's how Compass describe contractual benchmarking in their August newsletter. You don't hear the same message from Gartner, Maturity, Alsbridge, or Metri, but this has been a consistent position by Compass. Back in 2007 they opened a web cast on "The Power And The Pain Of Benchmarking" with the words "Benchmarking can be a long and trying process for both client and vendor (and benchmarker)".

It may be strange marketing, but Compass are telling it like it is. Contractual benchmarking is not growing, and recent staff reductions at benchmarkers suggest it may be declining. Customers see more value in having a benchmark clause then they do in executing one. Having the clause re-assures everyone that there is mechanism for prices to track the market during the contract. Actually doing a benchmark takes time and money which many customers would rather focus on improving the business.

Yet this is an industy which is reluctant to improve itself. Negotiating a benchmark clause is still a haphazard process. Customers, outsourcers, lawyers, and consultants horse-trade over the wording of the clause, but benchmarkers are rarely consulted and clauses are still signed today which benchmarkers would advise against. A benchmark clause takes 4 pages in a 400 page outsourcing contract. On most transactions, there is a strong drive to finalise as many sections as possible in the time available. There is no incentive for the industry to improve the standard of clauses.

When a customer comes to execute a benchmark clause, benchmarkers clamber over each other to offer a fixed price, even though the effort it will take them to collect data and agree a peer group is largely out of their control. Procurement helps by negotiating the price of the benchmark down to that of the lowest bidder, so it is a constant struggle for a benchmarker to deliver their work profitably. There simply aren't the margins in this work to allow the benchmarkers to invest in improving their data and methodologies, which is probably why there has been so little innovation in benchmarking over the last 10 years.

Benchmarkers are increasingly resentful when outsourcers or customer want to inspect their calculations. Yet it is surely wrong to argue the opposite - that there should be no quality standards of any kind for a process which affects the jobs and businesses of all involved.

There are no published studies on the effectiveness of contractual benchmarking. Several academics have tried, but found it extremely difficult to reach customers who are willing to talk about their benchmarking experiences. So we simply don't know how often they have a positive outcome for a customer, and whether they are cost-effective.

No wonder then, that one benchmarker said to me "Get me out of this hell-hole" when we met in the airport bar after a particularly long and contentious benchmark meeting. These are the reasons why I don't work on contractual benchmarks any more, and why the next post will be my last word on contractual benchmarks.


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